Ambrose Evans-Pritchard has written an article on a United Nations report on debt and default.
He is a Keynesian. He worries about deflation. Deflation is the ultimate negative sanction in his view. Like all Keynesians, he does not understand the healing effects of deflation.
But I read him because he provides data on the fragility of today's debt-based Keynesian economy. What he fears, I look forward to: the day of reckoning on debt, which is the bastard child of central bank inflation and government deficits. Like an unwed couple, Keynesians want to continue the liaison, but without negative consequences. There are always negative consequences.
The third leg of the world's intractable depression is yet to come. If trade economists at the United Nations are right, the next traumatic episode may entail the greatest debt jubilee in history.
The Jubilee was Mosaic Israel's mandated year of return to the land distribution of the original generation of the conquest. It applied only to rural land. It did not apply to real estate in walled cities. The heirs of the families of the conquest got back their land. The larger the families, the smaller the parcels. The law also liquidated all debt, including commercial debt. This was supposed to happen every 50th year. There is no evidence that this law was ever honored.
It may also prove to be the definitive crisis of globalized capitalism, the demise of the liberal free-market orthodoxies promoted for almost forty years by the Bretton Woods institutions, the OECD, and the Davos fraternity.
The Bretton Woods institutions are all a bunch of interlopers. Bretton Woods died on August 15, 1971, when Nixon killed it. The Bretton Woods system rested on the gold exchange standard. The dollar was redeemable in gold by central banks at $35/oz. Without this limit, the U.S. central bank could inflate at will. The federal government could run massive deficits financed by monetary inflation. That is why Nixon did it, and the FED responded as planned. The USA got the worst peacetime price inflation in its history.
The liberals in the IMF and World Bank rejoiced. So did politicians. So did Keynesian economists everywhere. No more pseudo-gold standard. "Free at last! Free at last!" Free to inflate. Free to run massive deficits.
The bills are about to come due. Now we hear a new phrase. "It's just not fair!" Ambrose Evans-Pritchard shouts this with gusto.
"Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out," said the annual report of the UN Conference on Trade and Development (UNCTAD).
Notice the limit: corporate debt. Not government debt. Government debt is always healthy in the view of Keynesians. There can never be enough government debt. They are apologists for the next round of government debt. But corporate debt -- that's dangerous.
We know already that the poisonous side-effect of zero rates and quantitative easing in the US, Europe, and Japan was to flood developing nations with cheap credit, upsetting their internal chemistry and drawing them into a snare. What is less understood is just how destructive this has been.
But how did these rates come into existence? By central banks that pursued zero rates after 2008 to stimulate the economy. This was done to encourage more borrowing by governments and businesses.
Much of the money was wasted, skewed towards "highly cyclical and rent-based sectors of limited strategic importance for catching up," it said.
Of course the money was wasted. Whenever any scarce resource is treated by the government as a zero price asset, it will be wasted. That has been the free market economists' criticism of all government intervention for over a century.
What is a "rent-based sector." That is econo-speak for people who pursue income based on government intervention into the free market. People seek government guarantees of income.
In the field of debt, this is the carry trade. The central bank forces down short-term rates. In the USA, this means the rate the Federal Reserve pays on excess bank reserves. Other short-term rates follow. Then big money investors borrow short at low rates and lend long at high rates: bond rates. They get free money: the difference between the two rates. They can be wiped out if short-term rates rise. They get caught in a massive squeeze. But in the meantime, they make hay while the sun shines. They seek those bond yield "rents."
Worse yet, these countries have imported the deformities of western finance before they are ready to cope with the consequences. This has undermined what UNCTAD calls the "profit-investment nexus" that ultimately drives growth and prosperity.
Nobody is willing to cope with the consequences. That's the foundation of all Keynesianism. It is a world without negative sanctions, only positive ones. The big one -- the ultimate one -- is massive debt that can no longer be funded.
That is what critics of Keynes have said ever since 1936. Keynesians have laughed in derision.
Some of them have stopped laughing.
The extraordinary result is that some countries are slipping backwards, victims of "premature deindustrialisation". Many of them have fallen further behind the rich world than they were in 1980 despite opening up their economies and following the global policy script diligently.
This is what Austrian economist Eugen von Bohm-Bawerk called the shortening of the structure of production. He said this back in the 1880's. Ludwig von Mises identified the causes in 1912: central bank inflation. He argued this way in The Theory of Money and Credit. Most economists derided this at the time. By 1950, this included virtually all economists.
Mises was right. He was not just right about the inherent irrationality of socialist economics, which he argued in 1920. He was also right about the boom-bust cycle: the bust is the inevitable effect of the rent-seeking actions of investors seeking to profit from central bank inflation.
We are now approaching the final phase of this cycle. This is what Evans-Pritchard is arguing. He may be correct.
It's about time.
The middle income trap closed in on Latin America and the non-oil states of the Middle East a long time ago, but now it is beginning to close in such countries as Malaysia and Thailand, and in some respects China. "The benefits of a rushed integration into international financial markets post-2008 are fast evaporating," it said."If policymakers fail to mitigate the negative impacts of unchecked global market forces, then a turn to protectionism could trigger a vicious downward spiral for everyone."
They've got it.
Yet the suffocating liabilities built up over the QE years remain. UNCTAD says corporate debt in emerging markets has risen from 57pc to 104pc of GDP since the end of 2008, and much of this may have to written off unless there is a world policy revolution."If the global economy were to slow down more sharply, a significant share of developing-country debt incurred since 2008 could become unpayable and exert considerable pressure on the financial system," it said.
They've got it.
"There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European bond market," it said.
They haven't got it.
There is no such thing as capital flight. Capital does not flow out. Does a factory flow out? Did homes flow out in 2009-10? No. Ownership changed. People tried to sell at 2007's prices. "No can do!" That was "the big short."
Capital stays put. Investors are running. They try to get out. They find that they cannot get out at yesterday's higher prices. This is called the bust. It is called recession. It was called depression, 1930-41.
Keynesianism offers only two solutions: more government deficits and more central bank digital money. But today, the game is nearing the two-minute warning.
There are still takers. Corporations float bonds and use the money to buy back shares. This rewards senior managers with stock options. But the time remaining to exercise these options is running out.
There are no free lunches. Only a few people can profit from rent-seeking. At some point, the strategy dies.
We are fast approaching this point.
These are deeply-disturbing assertions. The combined US subprime and 'Alt-A' property exposure before the Lehman crisis was just $2 trillion, and Greece's debts were trivial. What UNCTAD is talking about is an order of magnitude larger.Views differ on whether the emerging market bloc is really out of the woods. UNCTAD says capital outflows reached $656bn last year after the US Federal Reserve turned off the liquidity spigot, and a further $185bn left in the first quarter of this year.
While there has been a respite over recent months thanks to the Fed's retreat, UNCTAD fears that the underlying rot is pervasive.
They've got it.
We are left with a world in a state of leaderless policy inertia, unable to escape slow suffocation. Trade is stagnant. Deflation is still knocking at the door a full seven-and-a-half years into the economic cycle, even with the monetary pedal pushed to the floor. The next downturn will test this regime to destruction.
The monetary pedal is not being pushed to the floor in the United States. The FED ceased inflating two years ago. But rates are still close to zero, held up only by the FED's policy of paying 0.5% on excess reserves deposited by commercial banks. This money is paid out of the FED's earnings. But then this money cannot be returned to the Treasury at the end of the year. Every dollar paid to commercial banks for excess reserves comes out of the Treasury's wallet. The federal deficit grows larger by this amount.
The FED never mentions this. The public is unaware of it. As far as I know, I am the only critic who keeps mentioning this. There may be others, but I have not found them.
The UN's diagnosis is that "shareholder primacy" and the entire edifice of liberal market finance are among the key culprits, all made worse by stringent fiscal austerity that has starved the global economy of sufficient demand.
Stringent fiscal austerity. These people live in a fantasy world. Fiscal austerity would mean government budget surpluses: more revenue than expenses, with the money used to pay off government debt.
There is not a single example of fiscal austerity on earth. There has not been one since approximately 1836: the first (and last) year that the U.S. government had no debt.
Its prescription is radical. The world must jettison neo-liberal ideology, and launch a "global new deal" with a blitz of investment on strategic sectors. It wants a return of the "developmental state", commanding a potent industrial policy, and backed by severe controls on capital flows.
Same old same old. It's John Maynard Keynes' prescription from 1936.
"Severe controls on capital flows" means currency exchange controls: making it illegal to sell your declining asset to a foreign buyer. In short, it means the end of liberalism.
If you think a worldwide tariff war would be bad for the world's economy, think of what "severe controls on capital flows" would do.
Keynesians are economic blind men. They cannot follow economic cause and effect. Keynesianism is blind men's bluff, and always has been.
"If policymakers fail to mitigate the negative impacts of unchecked global market forces, then a turn to protectionism could trigger a vicious downward spiral for everyone," it said.
"Unchecked global market forces" means the right to buy and sell to someone who lives across a border.
This is mercantilism. But Keynesianism has always had mercantilism at its bedrock foundation. It denies the efficacy of free market operations in the fields of government debt and central banking. It calls on government coercion.
The UNCTAD critique - controversial to be sure - is that activist funds have acquired a stranglehold over the corporate management, leading to a culture of share-buybacks and the relentless extraction of profit. "Corporations are not reinvesting their profits into production capacity, jobs, or self-sustaining growth," it says.
That's what "rent-seeking" is: the refusal to invest in productive capital. It is the pursuit of government subsidies.
While the profit share of GDP has risen to an historic high of 36pc of GDP from 30pc in 1980, private investment has slumped to 17pc from 21pc. This accumulation of unused savings is itself a major cause of the deflationary malaise.
Excuse me? What are unused savings? If I put money in a bank, the bank lends it out.
Admittedly, if it lends it to the Federal Reserve System, the money is not reinvested. It becomes the equivalent of vault cash in a bank -- digital vault cash. Excess reserves are "unused savings." I am unaware of any other unused savings in the economy. Money has to go somewhere. Investors seek a positive rate of return. They may even buy capital return insurance and buy government bonds paying negative rates. This is simply an insurance premium on capital charged by governments.
It also explains the conundrum of collapsing productivity. There is no need for the grim pessimism of Professor Robert Gordon, who thinks the great the spurt of human progress over the last 250 years is largely exhausted, supposedly because we have already made most of the great advances. Falling investment explains it well enough.
Dr. Gordon is one of the few economists on earth who could profitably take a lower division course from Paul Krugman.
The UN's advice to the emerging nations is to retake control of their destiny and turn the tables on the financial elites. They should impose capital controls, preferential tax treatment for retained earnings, and force fund managers to hold assets for longer. They should allocate credit without apology, and learn a trick or two from the Korea's methods of "financial repression".
Think "Venezuela."
It is not to everybody's taste. UNCTAD's manifesto of Left-wing proposals clashes with almost every nostrum taught in universities and business schools for the last two generations. Yet its arguments cannot be dismissed lightly, and its dissenting voice deserves to be heard.
It deserves to be heard as the dying gasp of a dying economic theory: Keynesianism.
The report puts the advocates of globalisation (as practiced) in a quandary. They - or we, perhaps I should say - typically argue that it has vastly raised the living standards of hundreds of millions of people across Asia.It allegedly "works" for emerging nations, and this is cited as the paramount moral justification even if free flows of capital have regrettably allowed multinationals to fatten on 'labour arbitrage' and play off western wages at against low-pay hubs abroad.
But what UNCTAD shows is that globalisation has not in fact worked for these countries, bar a few exceptions. One starts to suspect that it works for nobody except the owners of capital and their close allies.
So, China was richer under Mao. Right.
Besides, I have a hunch that UNCTAD's moment may be coming. It was Britain's Margaret Thatcher who kicked off the neo-liberal age of tax cuts, privatisation, and unfettered supremacy of the markets.With uncanny timing - fit from a Conservative Party that has outlived every other major party in the world from sheer instinct and fingerspitzengefühl - Theresa May may now start to close that era with her embrace of industrial strategy.
And pigs may fly -- Real Soon Now.
What is clear is that the world will soon need a massive and coordinated spending push by governments to create demand and bring the broken global system back into equilibrium. UNCTAD is entirely right about that.
Governments create demand. That's what Keynes promised.
If this does not happen, it is sauve qui peut.
Roughly translated, sauve qui peut means this: "Your check is in the mail."
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